What will happen to markets in case Feb CPI rises well over expectations? What would happen if it inflation undershot expectations of 6.0% y/y and 0.4% m/m ? The SVB implosion has eliminated odds of a 50-bp Fed hike, boosting metals and non-USD FX. Even odds of a 25-bp hike (not 50bp) are now below 60%. The chart on the left shows the straightforward relationship between odds of a 25-bp hike and gold, with the odds plotted on an inverted scale. But let's dig deep on the right-hand chart, plotting the FedFunds rate against the 2-year yield/FedFunds spread.
In a matter of 4 days, US 2-year yields have gone from hitting 16-year highs to posting the biggest drop in 40 years. The 4.09% print is 0.66 below the Fed Funds rate—a level at which the Fed Funds rate had peaked shortly before the Fed began cutting rates. This is highlighted in the chart as Aug 2007 and June 2019.
What's the rationale for this development? In absolute terms (not relative to other tenors), the short-end of the curve is always the last to begin pricing the end of rate hikes or rate cuts. So when 10-year yields fell below their 2-year and 3-month counterparts last autumn, the yield curve entered inversion as the longer-end began pricing slowdown/end of hikes. During that time, however, both 2-year and 3-month yields (t-bills) were on the rise. And as we know, 2-yr yields hit a 15-year high early last week. So just a reminder: Yield curve inversions usually precede rate cuts by 1-2 years, while re-steepening of the curve (when short-term yields start to fall towards longer-term yields) is usually a more accurate indicator of timing of the cuts as it is closer to it materialising.
Finally this week, both 2-year and 3-month yields registered a sharp decline, in response to deep repricing of Fed hike expectations following the collapse of SVB. The rise in US unemployment and slowdown in average hourly earnings in Friday's jobs report (full analysis here) did help to weigh on yields, USD and boost metals. When it rains, it pours -- “Risk happens fast” as the market saying goes.
If Tuesday's release of the Feb CPI comes in at or below 6.0%, then gold could easily regain $1960. This also depends on what the m/m reading does. There are various permutations from the CPI release, paving the way for a $30-40 jump in gold. What if CPI rises above 6.5% y/y? I would say stocks will generally bear the worst of such outcome, with a possible bounce in yields but eventual rally in gold following an initial selloff.
Meanwhile, our WhatsApp Broadcast Group does not waste time. 5-7 seconds after the CPI release, members will get a voice note with my immediate assessment of the whole CPI report, focusing on what it means for gold/indices/FX, later followed by text messages, trades and charts. Good luck.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks

AUD/USD: Extra gains need to clear 0.6400
AUD/USD rose for the third day in a row, approaching the key 0.6400 resistance on the back of the acute pullback in the US Dollar amid mounting recession concerns and global trade war fear.

EUR/USD: Powell and the NFP will put the rally to the test
EUR/USD gathered extra steam and advanced to multi-month peaks near 1.1150, although the move fizzled out somewhat as the NA session drew to a close on Thursday.

Gold looks offered near $3,100
Prices of Gold remain on the defensive on Thursday, hovering around the $3,100 region per troy ounce and retreating from earlier all-time peaks near the $3,170 level, all against the backdrop of investors' assessment of "Liberation Day".

Interoperability protocol hyperlane reveals airdrop details
The team behind interoperability protocol Hyperlane shared their upcoming token airdrop plans happening at the end of the month. The airdrop will occur on April 22, and users can check their eligibility to receive $HYPER tokens via a portal provided by the Hyperlane Foundation by April 13, the team shared in a press release with CoinDesk.

Trump’s “Liberation Day” tariffs on the way
United States (US) President Donald Trump’s self-styled “Liberation Day” has finally arrived. After four straight failures to kick off Donald Trump’s “day one” tariffs that were supposed to be implemented when President Trump assumed office 72 days ago, Trump’s team is slated to finally unveil a sweeping, lopsided package of “reciprocal” tariffs.

The Best brokers to trade EUR/USD
SPONSORED Discover the top brokers for trading EUR/USD in 2025. Our list features brokers with competitive spreads, fast execution, and powerful platforms. Whether you're a beginner or an expert, find the right partner to navigate the dynamic Forex market.